Global Bonds Part Two

Our last piece on global bonds talked about the larger opportunity set outside of the US. That set includes developed and developing markets that range from Sweden to Indonesia.

In this piece, we will begin to examine a few developed market products that we do not feel warrant a place in most investor’s portfolio.

SPDR Barclays International Treasury Bond ETF (BWX)

This ETF has developed country debt mostly in Europe and Japan. The top three countries are the UK, Japan and Italy mostly in government bonds. The duration is 7 with an SEC yield of 1.66%. This ETF holds approximately $2 billion in assets and should be sold for the following reasons. The interest rate risk is much too high for the yield compensation. There is value in some government bonds in developed countries but it takes a strong team to determine those values. Also, it has a focus on investment grade, non-dollar debt so an investor is stuck in non-dollar bonds and has little opportunity for high yield opportunities. We understand the goal is to expand the Treasury Bond opportunity set but unless your investment committee has a strong positive view on the return and risk characteristics of this instrument, it should be sold. You would need an in-depth view on the monetary policies of the major countries in the ETF.

SPDR Barclay’s Short Term International Treasury Bond ETF (BWZ)

This ETF has developed country bonds mostly in Europe and Japan. The top three countries are Japan, Germany and Italy, mostly in government debt. The duration is 1.81 with an SEC 30 day yield of .63%. This ETF holds approximately $238 million in assets and should be sold for the following reasons. The interest rate risk is too high for the yield compensation and while there is value in some government bonds in developed countries, it takes a strong team to determine those values. Unless your investment committee has a strong positive view on the return and risk characteristics of this instrument and the underlying country’s monetary policy, currency outlook and credit conditions, then an active manager would likely be a better option.

I-Shares 1-3 year International Treasury Bond ETF (ISHG)

This ETF has developed country bonds in Europe and Japan. The top three countries are Japan, Italy and France mostly in government debt. The duration is 1.81 with an SEC 30 day yield of .23%. This ETF holds approximately $173 million in assets and should be sold for the following reasons. The interest rate risk is too high for the yield compensation and the investment grade non-dollar debt focus excludes high yield and dollar denominated debt. Unless your investment committee has a strong positive view on the return and risk characteristics of this instrument and the underlying countries, it should be sold.

I-Shares International Treasury Bond ETF (IGOV)

This ETF has developed country bonds mostly in Europe and Japan. The top three countries are Japan, Italy and France mostly in government debt. The duration is 6.85 with an SEC 30 Day yield of 1.37%. This ETF holds approximately $600 million in assets and should be sold due to the following reasons. The interest rate risk is too high for the yield compensation and the investment grade non-dollar debt mandate is inflexible. Once again, unless your investment committee holds a strong positive view on the return and risk profile of this ETF, it should be sold.

Zenith recommends that firms sell any and all of these holdings. The portfolios are reasonably stuck in non-US Government Debt in advanced countries in their local currency. These two attributes place an investor in an inflexible position. Additionally, they are left with uncompensated interest rate risk even with the short term funds.

We have not covered fees as we would not invest in these funds even if the fee was zero as they do not possess any attractive attribute for investment. The only way a firm could legitimize a purchase is if they hold a strong view on the monetary policy, interest rate direction and inflation pressures in Japan, greater developed Europe as well as Great Britain. A seasoned manager would best be suited to extract the value in each of these markets given a solid team with macro experience.